US carbon cap, seen as crux of post-Kyoto treaty

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A global carbon market will more likely underpin a new climate treaty, meant to be agreed this year to replace the Kyoto Protocol, after US support for a national cap and trade scheme. But crashing European carbon prices have hardened concerns that using markets may drive a stop-start fight against climate change.
Trading approaches penalize carbon emissions and fight climate change by forcing energy companies, for example, to buy an allowance or permit for every ton of carbon emissions.

President Barack Obama on Thursday backed a “market-based cap on carbon” and his budget detailed plans to raise $80 billion annually from selling carbon allowances from 2012. Europe’s four-year-old scheme had a traded value of $90 billion last year. A linked US-European Union carbon market is the grand vision of EU regulators who want to create a broad, low-cost carbon regime for business.

That could be a big plank of a new international climate treaty to replace the Kyoto Protocol after 2012, which faces a tight deadline for agreement in Copenhagen in December.

“That kind of linkage is actually emerging as the potential de facto post-Kyoto architecture,” said Harvard University’s Robert Stavins, referring to links with possible cap and trade schemes in Australia, Canada, Japan and the United States.

Systems could link through globally traded carbon offsets which allow companies to meet domestic carbon caps by paying for emissions-cutting projects in developing countries. Obama’s support has added momentum for a global carbon market but a US cap and trade scheme is not guaranteed. By forcing companies to buy carbon permits, such schemes impose extra costs on industry and swell fuel bills. Republican opponents compare them to a tax which they say the US economy and households cannot bear.

Backing
Obama’s backing for a market approach adds to that of the United Nations, which wants to use carbon offset schemes to raise cash for climate action in developing countries. But the UN’s climate chief Yvo de Boer said developing countries increasingly wanted public money, too. Given what climate science says, the first offers of the United States and Europe for Copenhagen to cut greenhouse gases by about 15 percent below current levels by 2020 were not enough for rich nations as a group, de Boer added.

Boom-Bust
Like many traded commodities EU carbon permits have lost more than half their value since last July, as a result of falling industrial output and demand for emissions permits.

European carbon prices are now far below levels which can, on their own, make expensive, low-carbon energy technologies competitive with fossil fuels such as coal, gas and oil. Energy companies say they are still investing in low-carbon research and development of technologies such as carbon capture and storage - which buries underground greenhouse gases trapped from coal plants - but the timing of projects may be delayed.

“It may shift the timing, it’ll be very project-specific,” said David Hone, climate adviser at oil company Royal Dutch Shell. “The fundamentals aren’t changing, Obama is saying ‘bring me cap and trade, we’re ready’, that’s what sets your strategy not the carbon price right at this moment.”
The United States could introduce price controls to avoid EU-style volatility - as much to escape high carbon prices, which swell fuel bills, as low ones. “You can have a price ceiling and a price floor … there is increasing discussion of this in the US,” said Harvard University’s Stavins.
Carbon traders and EU regulators deplore such intervention, saying that the aim of the market is simply to put a cap on carbon emissions and leave the price to dealers.
But extremely low EU prices may continue through 2010 and coupled with volatility undermine investment and emissions trading, argues Michael Grubb, chief economist at the UK-funded Carbon Trust and chair of the Climate Strategies research group.
“The current (low price) situation could wreak huge damage on the credibility of emissions trading and undermine the EU’s attempts to forge a platform of leadership in the Copenhagen negotiations,” he said in a draft Climate Strategies paper to be published next week.

He advocated a minimum carbon price in government-led auctions of permits, with immediate effect.